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ESSAY the End of History for Corporate ESSAY The End of History for Corporate Law HENRY HANSMANN* AND REINIER KRAAKMAN** INTRODUCTION Much recent scholarship has emphasized institutional differences in corporate governance, capital markets, and law among European, American, and Japanese companies.' Despite very real differences in the corporate systems, the deeper tendency is toward convergence, as it has been since the nineteenth century. The basic law of corporate governance-indeed, most of corporate law-has achieved a high degree of uniformity across developed market jurisdictions, and continu- ing convergence toward a single, standard model is likely. The core legal features of the corporate form were already well established in advanced jurisdictions one hundred years ago, at the turn of the twentieth century. Although there remained considerable room for variation in governance prac- tices and in the fine structure of corporate law throughout the twentieth century, the pressures for further convergence are now rapidly growing. Chief among these pressures is the recent dominance of a shareholder-centered ideology of corporate law among the business, government, and legal elites in key commer- cial jurisdictions. There is no longer any serious competitor to the view that corporate law should principally strive to increase long-term shareholder value. This emergent consensus has already profoundly affected corporate governance practices throughout the world. It is only a matter of time before its influence is felt in the reform of corporate law as well. I. CONVERGENCE PAST: THE RISE OF THE CORPORATE FORM We must begin with the recognition that the law of business corporations had already achieved a remarkable degree of worldwide convergence at the end of the nineteenth century. By that time, large-scale business enterprise in every major commercial jurisdiction had come to be organized in the corporate form, and the core functional features of that form were essentially identical across these jurisdictions. Those features, which continue to characterize the corporate form today, are: (1) full legal personality, including well-defined authority to * Professor, Yale Law School. ** Professor, Harvard Law School. 1. See, e.g., Bernard S. Black & John C. Coffee, Jr., Hail Britannia?:Institutional Investor Behavior Under Limited Regulation, 92 MICH. L. REV. 1997 (1994); Ronald J. Gilson & Mark J. Roe, Understand- ing the JapaneseKeiretsu: Overlaps Between Corporate Governance and Industrial Organization, 102 YALE L.J. 871 (1993); Mark J. Roe, Some Differences in Company Structure in Germany, Japan, and the United States, 102 YALE L.J. 1927 (1993). 440 THE GEORGETOWN LAW JOURNAL [Vol. 89:439 bind the firm to contracts and to bond those contracts with assets that are the property of the firm, as distinct from the firm's owners; 2 (2) limited liability for owners and managers; (3) shared ownership by investors of capital; (4) del- egated management under a board structure; and (5) transferable shares. These core characteristics, both individually and in combination, offer impor- tant efficiencies in organizing the large firms with multiple owners that have come to dominate developed market economies. We explore those efficiencies in detail elsewhere. 3 What is important to note here is that while those character- istics and their associated efficiencies are now commonly taken for granted, prior to the beginning of the nineteenth century there existed only a handful of specially chartered companies that combined all five of these characteristics. The joint stock company with tradeable shares was not made generally available for business activities in England until 1844, and limited liability was not added to the form until 1855.4 While some American states developed the form for general use a few years earlier, all general business corporation statutes appear to date from well after 1800. By around 1900, however, every major commer- cial jurisdiction appears to have provided for at least one standard-form legal entity- with the five characteristics listed above as the default rules, and this has remained the case ever since. Thus there was already strong and rapid conver- gence a century ago regarding the basic elements of the law of business corporations. It is, in general, only in the more detailed structure of corporate law that jurisdictions have varied significantly since then. The five basic characteristics of the corporate form provide, by their nature, for a firm that is strongly responsive to shareholder interests. They do not, however, necessarily dictate how the interests of other participants in the firm-such as employees, creditors, other suppliers, customers, or society at large-will be accommodated. Nor do they dictate the way in which conflicts of interest among shareholders themselves-and particularly between controlling and noncontrolling shareholders-will be resolved. Throughout most of the twentieth century there has been debate over these issues and experimentation with alternative approaches to them. II. THE SHAREHOLDER-ORIENTED (OR "STANDARD") MODEL Recent years, however, have brought strong evidence of a growing consensus on these issues among the academic, business, and governmental elites in leading jurisdictions. The principal elements of this emerging consensus are that ultimate control over the corporation should rest with the shareholder class; the 2. See Henry Hansmann & Reinier Kraakman, The Essential Role of OrganizationalLaw, YALE L.J. (forthcoming 2000). 3. See HENRY HANSMANN, THE OWNERSHIP OF ENTERPRISE (1996); Henry Hansmann & Reinier Kraakman, What Is Corporate Law?, in THE ANATOMY OF CORPORATE LAW: A COMPARATIVE AND FUNCTIONAL APPROACH (Reinier Kraakman et al. eds., forthcoming 2001). 4. See PHILLIP BLUMBERG, THE LAW OF CORPORATE GROUPS: SUBSTANTIVE LAW 9-20 (1988). 2001] THE END OF HISTORY FOR CORPORATE LAW managers of the corporation should be charged with the obligation to manage the corporation in the interests of its shareholders; other corporate constituen- cies, such as creditors, employees, suppliers, and customers, should have their interests protected by contractual and regulatory means rather than through participation in corporate governance; noncontrolling shareholders should re- ceive strong protection from exploitation at the hands of controlling sharehold- ers; and the market value of the publicly traded corporation's shares is the principal measure of its shareholders' interests. For simplicity, we shall refer to the view of the corporation comprised by these elements as the "standard shareholder-oriented model" of the corporate form (or, for brevity, simply "the standard model"). To the extent that corporate law bears on the implementation of this standard model-as to an important degree it does-this consensus on the appropriate conduct of corporate affairs is also a consensus as to the appropriate content of corporate law, and it is likely to have profound effects on the structure of that law. A. IN WHOSE INTEREST? As we argue in Part IV, there is today a broad normative consensus that shareholders alone are the parties to whom corporate managers should be accountable, resulting from widespread disenchantment with a privileged role for managers, employees, or the state in corporate affairs. This is not to say that there is agreement that corporations should be run in the interests of sharehold- ers alone-much less that the law should sanction that result. All thoughtful people believe that corporate enterprise should be organized and operated to serve the interests of society as a whole, and that the interests of shareholders deserve no greater weight in this social calculus than do the interests of any other members of society. The point is simply that now, as a consequence of both logic and experience, there is convergence on a consensus that the best means to this end (that is, the pursuit of aggregate social welfare) is to make corporate managers strongly accountable to shareholder interests and, at least in direct terms, only to those interests. It follows that even the extreme proponents of the so-called "concession theory" of the corporation can embrace the primacy of shareholder interests in good conscience.5 5. In a hoary debate that cuts across jurisdictional boundaries, proponents of the view that corpora- tions exist by virtue of a state "concession" or privilege have also been associated with the view that corporations ought to be governed in the interests of society--or all corporate constituencies-rather than in the private interest of shareholders alone. See, e.g., E. Merrick Dodd, Jr., For Whom Are CorporateManagers Trustees?, 45 HARv. L. REV. 1145, 1148-50 (1932); PAUL G. MAHONEY, CONTRACT OR CONCESSION? A HISTORICAL PERSPECTIVE ON BuslNESS CORPORATIONS (University of Virginia School of Law, Working Paper, 1999) (on file with author). Conversely, proponents of the view that the corporation is at bottom a contract among investors have tended to advance the primacy of shareholder interests in corporate governance. In our view the traditional debate between concession and contract theorists is simply confused. On the one hand, corporations-whether "concessions" or contracts-should be regulated when it is in the THE GEORGETOWN LAW JOURNAL [Vol. 89:439 Of course, asserting the primacy of shareholder interests in corporate law does not imply that the interests of corporate stakeholders must or should go unprotected. It merely indicates that the most efficacious legal mechanisms for protecting
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